In one of the most closely watched False Claims Act (FCA) cases in years, the Supreme Court unanimously decided on June 1 that when determining intent under the statute, courts must consider the state of mind of the defendant at the time a claim is submitted to the government, and not on some objective standard of reasonableness. This article will briefly describe the facts, arguments and holdings in these consolidated cases and then focus on tips for those in the health care industry to navigate the submission of claims in the face of legal and regulatory ambiguity.
The two cases—U.S. ex rel. Schutte v. SuperValu Inc. and U.S. ex rel. Proctor v. Safeway, Inc., Case Nos. 21-1326 and 22-111, respectively—involved the requirement that retail pharmacies report and charge the lowest of two numbers, one of which was their “usual and customary” price to Medicare and state Medicaid agencies. The pharmacies routinely provided discounts to customers as part of a program to match competitors’ lower prices and also to customers without insurance who paid in cash. Relators argued that those discounted prices constituted the majority of the pharmacies’ sales and hence those discount prices were the “usual and customary” prices—not the significantly higher “rack rate” the pharmacies were charging Medicare and Medicaid. The pharmacies argued, and the Court did not disagree, that the meaning of “usual and customary” was ambiguous and subject to various interpretations. In discovery, relators developed significant evidence in support of their claims; emails indicated that executives at the retail pharmacies directed employees that even though discounts were being provided, the pharmacies’ policy was that they did not provide discounts, in an attempt to hide their discounted prices from state and federal agencies. The District Court, although finding that the discounted prices were indeed the “usual and customary” prices and, hence, that the filings were false, ruled for the defendants on the scienter element, finding that due to the ambiguity of “usual and customary,” the pharmacies could not have had the requisite knowledge of the falsity. The Seventh Circuit upheld the district court’s grant of summary judgment to the defendants, holding that the Supreme Court’s opinion in Safeco Ins. Co. of America v. Burr, 551 U.S. 47 (2007), provided that if the defendants acted consistent with an objectively reasonable interpretation of an ambiguous law or regulation, they could not have “knowingly” made a false claim.
The Supreme Court granted the relators’ cert petition describing the question presented as “whether respondents could have the scienter required by the FCA if they correctly understood that standard and thought that their claims were inaccurate.” In a unanimous opinion authored by Justice Thomas, the Supreme Court reversed. Focusing on the three-pronged definition of “knowledge” as set forth in the FCA, the Court noted that each prong—actual knowledge, reckless disregard and deliberate ignorance—focuses on what the defendant thought and believed at the time the claim was made. The Court then went on to reject each of the defendants’ main arguments that the ambiguity of the phrase “usual and customary,” without more, precluded a finding that the defendants acted “knowingly” in submitting false claims. First, the Court held that the defendants failed to seek clarifications of any ambiguity and, indeed, were aware that their claims were not supported by any reasonable interpretation and then sought to hide their higher prices from CMS and state agencies. Second, the Court rejected the Seventh Circuit’s reading of Safeco, noting that it interpreted a different statute—the Fair Credit Reporting Act—with a “willfulness” as opposed to a “knowledge” mens rea standard. In addition, the Court noted that nothing in Safeco authorized courts to absolve defendants based on facts or legal interpretations not known to the defendants at the time claims were submitted. Third, the Court addressed the defense argument that a claim based on a misinterpretation of an ambiguous law or regulation cannot be the basis of a false claim, since at common law a misrepresentation of law could not be the basis of a fraud claim. The Court rejected this position, noting the claims here were not purely ones of law, but rather a mixed statement of law and fact: not “usual and customary means X” but rather “these are our usual and customary prices.”
The Court, having rejected an objective mens rea standard for the FCA, affirmed that such inquiries will continue to be highly factual. In light of this landscape, what can those operating in the health care industry do to protect themselves when submitting claims for payment to federal and state agencies under regulations that are not always 100% clear? The Court’s holding—as well as the parties’ and amici briefs—suggest several prudential steps:
- Ask for clarification. As the Court noted, not only did defendants here not seek clarification of the meaning of “usual and customary” from relevant state and federal agencies, but they also actively sought to conceal their self-serving interpretation supporting their claims. Amici noted that often the government either does not respond to such requests for clarification or gives vague or contradictory answers that only aggravate the issue. But the lesson of the Court’s opinion is that a defendant acting in good faith would try to obtain such clarification, even if such efforts are futile.
- Show your work. If possible, with each claim, or by some separate channel of communication, disclose to the government that your claims are based on a particular interpretation of an ambiguous law or regulation. In this way, the government can judge whether or not the claim is correctly made.
- Seek, and rely on, competent and knowledgeable legal advice. For an interpretation of an ambiguous law or regulation to be seen as reasonable at the time the claims are made, the interpretation should be based on legal advice from competent and knowledgeable counsel, after disclosure of all relevant facts. While this may not result in a perfect advice of counsel defense, it could go a long way toward establishing that any such claims were made in accordance with such legal advice. To the extent there is a concern about a subject matter waiver in connection with disclosing such advice, the advice should be sought in a narrow way so that any such waiver is limited.
- Document, document, document. Each of the above steps—and any others taken to establish good faith—should be carefully documented in a nonprivileged way in order to support good faith should any issue arise with respect to the legitimacy of the claims. This is even true of obtaining legal advice in support of an ambiguous legal position. At the Supreme Court, the defendants argued that adopting a subjective standard would require routine waivers of attorney-client privilege. But if such legal advice is sought in advance, and in such a way that it can be disclosed in a nonprivileged manner without a further subject matter waiver, this provides additional protection.
As noted in the introduction, while these cases were highly anticipated, the outcome really should not be a surprise. And the suggestions above are simply prudent ways to reduce the risk that FCA liability could result from claims submission in a legally ambiguous environment.